Credit Products & Services I Flashcards
1
Q
What is an Overdraft?
A
- Offer a high degree of flexibility
- Only available on current accounts
- Repayable to the bank on demand
- Normally agreed subject to annual review
- Interest is only charged on day-to-day balance outstanding on the account
- Are a conveniant and inexpensive way of borrowing to cover a customer’s short term requirements
2
Q
Give 2 examples of when an Overdraft may occur.
A
- When a business customer buys stock, you would expect that the balance of the account would swing into overdraft and once the stock is sold and sales income received, the accoun should swing back into credit
- A customer may have an account showing a debit balance prior to a monthly salary being paid in, at which point it swings into credit
3
Q
What is an account that remains in debit permanently referred to as?
How can this be remedied?
A
Hard core borrowing
- Cash injection
- Increased sales
- Turning it into a term loan
4
Q
What are Term Loans?
What types are there?
A
- Interest rates may be fixed or floating - floating rates are more usual and fluctuate at a margin over bank base rate or LIBOR
- Drawdown (the borrower takes the money available in stages as funds are req’d) of the loan may be in tranches, or instalments, on certain conditions being met
- Repayments are often geared to meet the cash flow of the business - there are holiday, bullet and balloon repayment schedules
- It is normal for security to be taken in support of term loans - should the terms of agreement be breached, the loan usually becomes repayable on demand, giving the bank the power to seek repayment and to realise its security
- Covenants are formal agreements made at the time of the loan - the loan agreement may contain obligations such as provision of info to the bank and adherence by the customer to financial covenants, e.g. interest cover, gearing and liquidity ratios
Variations on the theme of term loans,
- fixed rate loans
- capped rate loans
- discounted loans (i.e. lower payments for e.g. first 6 months)
- commerical mortgages
- professional practice loans (to assist qualified pro’s to finance private practice)
5
Q
How are House Purchase Loan amounts often decided?
Give 3 examples of house purchase loans.
A
The amount available to borrowers used to be a stipulated multiple of the customer’s/joint borrower’s combined salary. Now credit scoring is involved more.
- Bridging loans
- Self-build finance
- Equity/capital release loans
6
Q
What is a Bridging Loan?
What is a closed & open-ended bridging?
A
- Required when a major purchase precedes a major sale - thus closed bridging finance is a short term loan which will be repaid from a specific source
- Commonly encountered in house purchase & sale transactions - business customers may need bridging finance for the purchase of new premises before the old ones have been sold, or when the customer is buying a new business prior to selling the present one
- Closed bridging - when the date of the sale of the asset that is to repay the bridging has been confirmed.
- Open-ended bridging - when the sale of the asset that is to repay the bridging loan hasn’t been agreed
7
Q
Currently, is it easy to agree open-ended bridging loans?
A
No - not in current market conditions
8
Q
What are equity/capital release loans?
A
- Some banks are willing to lend customers a certain percentage of a customer’s equity in the customer’s property, provided the bank is granted security over the property
- The loans are normally granted at a rate linked to the banks mortgage rate
- The purpose of such loans are broadly similar to the purposes for personal loans
9
Q
What is Self-build finance?
When is a self-build valued?
A
A self-build loan is an advance that will finance the building, conversion or renovation of a property as the customer’s principal residence. By the nature of the project, the funding for this type of borrowing must be flexible. Either option could be used:
- funding of the project in arrears on confirmation of stage payments
- funding of the project in advance may be considered depending upon the individual proposition e.g. low LTV
Normally there are 2 valuations,
- a current and forecasted one at the start of the project
- a valuation at the end prior to loan (mortgage) drawdown
10
Q
What are the normal stages of a self-build project?
A
- Completion of the foundations/underbuildings
- Delivery of kit - if the house is to be of a kit structure
- Erection of kit/wall plate level
- Building made wind and watertight
- Formation of rooms to plasterboard/roof tiles stage
- Final stage
11
Q
It is normal practice to allow the customer to draw down at the end of each stage following formal certification from who?
A
- A qualified architect
- A NHBC solo inspector/acceptable structural warranty inspector
- A structural engineer
- Some other suitably qualified professional
12
Q
What are Personal Loans?
A
- Normally granted for the purpose of consumer purchases, e.g. cars, holidays, home improvements … etc
- Interest is charged at a flat rate, i.e. it is calculated on the total amount of the loan for the full term and applied to the amound of the loan at the commencement of the repayment term
- When an application is receieved it is usually credit scored to determine whether or not the bank is willing to grant the facility
- Personal loans fall within the “regulated agreement” criteria as set out in the Consumer Credit Acts
- Some personal loans carry automatic life cover and there is an option for the customer to purchase accident, sickness and unemployment insurance
13
Q
What are Budget Account Loans?
A
- Enables customers to spread the cost of their regular bills and expenses over a year
- The customer adds up all the bills and expenses that are due over the course of the year and agrees the total amount with the bank. This is divided by 12 and the result paid into the budget account by the customer each month from their operating account into which their salary is paid.
- The customer may be issued with a separate cheque book with which to pay bills, or they can arrange for their monthly and other direct debits/standing orders to be debited to the budget account
14
Q
What is Revolving Credit?
A
Normally used by wealthy people to stop them requiring the need to take out new loans every month.
- Allows a customer to draw up to a set limit, e.g. if a customer pays in £200 per month, the limit f borrowing may be set at £6,000 (30x£200)
- Intended primarily for professional customers with good income
- The application form is similar to that for a personal loan and the response data is credit scored
- It is usual to arrange for the monthly payment to be transferred from an operative account to the revolving credit account by standing order
- Interest is charged on a daily basis and normally applied monthly
- Insurance may be offered to pay off the debt in the event of the death of the customer or to meet repayments if the borrower has a prolonged illness or is made redundant
15
Q
What are Credit Cards?
A
- The purchase of goods and services on credit subject to an agreed overall limit
- The issue of regular statements by the credit card company
- The option for the customer of either paying all the sums due to the credit card company or electing to pay off only a portion of the sums due (min amount or 3-5%, whichever is the greater) and paying interest on the remainder
